Monthly Archives: June 2012

It is very often suggested that there is no point looking at solutions to the European crisis that don’t involve more “political union”, an EU institutional term meaning a move towards a more centralised and “federal” (in the special EU sense) union. This argument is curious.

For a start, what is it about political union that is meant to solve the problem? Some people will probably say that it would be “a message” or “a signal” or something, a demonstration of commitment to the European Union that would in itself create confidence. But this sounds a lot like hand-waving to me, or the kind of genius that suggested introducing a pan-European tax as a way of making the Union more popular (yes, Mr. Verhofstadt, it is not entirely forgotten).

More seriously, political unions tend to have a substantial budget and the capacity to use it in a discretionary sense. In the political union between the provinces of Germany, there is a systematic redistribution of money between richer and poorer parts of the union. In the political union between the states of America, there is less overt redistribution, but there are very large federal agencies that in practice tend to redistribute money around the union. NASA, for example, had a secondary and very important role subsidising the industrial development of the South-Eastern US, and this goal influenced important design decisions in the Apollo and Shuttle programs.

It is also true that some degree of redistribution is inseparable from anything that could be described as a political union. Try to imagine the opposite. The political union would have to be designed so as to make absolutely no change to the a priori distribution of income, an exercise that boggles the mind in its complexity and futility.

The simplest model would probably be a libertarian utopia/dystopia with a minimal state devoted solely to defence, funded by a flat tax on the citizens. But now imagine what would happen when its army deployed for annual exercises. A large quantity of income collected all over the union would suddenly be spent in the exercise area. If, as is likely, there were a limited number of convenient training areas, or the army tended to train where it expected to fight strategically, we would expect to see a military-industrial complex emerge in those areas.

Just because your biggest customer is the army doesn’t make you useless, of course, it may make you indispensable. And in that case, our political union that is not a transfer union would have to think about how to keep you going between deployments, in which case it would be undertaking both industrial and regional policy. A state (or political union) that has no budget, or a budget that is economically indistinguishable from the absence of one, is no state (or political union). Marx thought that the state would wither away in true communism; you can argue about what he meant, but I think he imagined a society in which the functions of the state were either unnecessary, or else carried out by the citizen as a matter of course, not even perceived as a duty. A state whose budget changed the structure of the economy so little as to be totally non-redistributive would, I think, have a fair claim to have withered away.

I can’t see how an entity that made no transfers of wealth or income can be considered to have the functions of a political union. Further, even if a political union was created that was not also a transfer union, it wouldn’t solve the problem. Various parts of Germany need transfers from others; the same goes for all political unions. Declaring “political union” doesn’t solve the problem in itself. It might be taken to mean “direct ECB management of Greek public finances”, but then this is just hoping that the Greeks can find some more money with more will, and perhaps a pony as long as the pony is Karlsruhe-compliant.

Here is the problem: political union is transfer union, or it is not political union, and anyway, if it is not transfer union it is no solution. Transfer union is unacceptable. Therefore, political union is unacceptable, and anyone who talks political union is saying “Let the file mature while we do what the EU does best, holding an Inter-Governmental Conference”.

This weekend I have been thinking quite a lot about what the world is gonna look like on Monday, and have come to the conclusion that it won’t be that different from the way it was last Friday. The big news surprise of the weekend was in fact Greece related - since the national football team qualified for the quarter finals of the Eurocopa, beating the Russia by a resounding 1-0.

I guess we will never know whether or not Mariano Rajoy uttered the two magic words so effectively immortalized in song by Fontella Bass that Saturday afternoon in late May as he cruised down the Chicago River in what Spanish media called a “Love Boat” ride, but one thing certainly is now clear, Angela Merkel has finally and definitively accepted Spain into the German embrace. Whether it will be a tender and loving one remains to be seen.

The Governing Council of the European Central Bank (ECB) has decided to discontinue the preparations for the Collateral Central Bank Management (CCBM2) project in its current form. In the project detailing phase, a number of challenges in the field of harmonisation were identified and the Eurosystem has decided to address these issues first before proceeding further with a common technical platform. The existing Correspondent Central Banking Model (CCBM) for cross-border collateral management remains in place.

Tracking back through the link trail, it seems that CCBM2 is a project that has existed since 2007, and was being jointly led by the Central Banks of Belgium and the Netherlands. It was focused on unifying the platforms for handling of cross-border collateral posted with the national central banks. Now while the functions of CCBM2 embraces some hot-button issues such as collateral and Target2 balances, this all appears to be a sensible decision that an IT-heavy project was dragging on, getting more complicated than first envisaged, and probably diverting time from other more important tasks. But with the fevered speculation out there about this weekend, did this seem like a good day to bury bad news that could instead be the wrong day to be telling people that the Eurosystem collateral management system has a few holes in it that won’t be fixed for a while?

The ECB’s Financial Stability Review for June 2012 is an interesting read. There’s a wealth of data and risk analyses. And one strange blind spot. Chapter III has a discussion of the market conditions for the issuance of senior unsecured bank debt. This market is at a trickle, which shows that whatever the reason the ECB has for insisting Ireland service legacy debt of this type in insolvent banks, it’s not to keep the current market open. Anyway, the chapter contains an extended box on the problem — as the review sees it — of rising asset encumbrance.

Germany’s Man at the ECB, Jörg Asmussen, popped up in Riga yesterday at a conference on the theme of the lessons of the Baltic adjustment over the last 5 years for other European countries. His message: it was better to take a huge hit to GDP up front:

This months manufacturing PMI data only confirm what several months of prior surveys (and now the latest US jobs report) have been telling us, namely that growth in the developed economies is getting scarcer and scarcer, and harder and harder to come by. Following a brief brief period of stabilisation, which lasted roughly from November last year to this January, conditions have been steadily deteriorating in manufacturing sectors across the planet, with the deterioration being lead by an ongoing decline in new export orders. Roped in together through the various trade channels, the worlds industrial base is now, even in the best of cases, barely ekeing out growth, as can be seen in the fact that the JP Morgan global index registered a mere 50.6 in May, only marginally above the 50 no change level. Continue reading →

Yesterday, with most of the world already in weekend mode, the IMF website carried a link to an item entitled Fiscal Safeguards. There is no explanatory text with the link. Going into the very brief main document is slightly more informative: